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Tips of Drafting Purchase and Sales Contract Under Chinese Law

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The preparation of legal documents involves difficult or doubtful legal questions which, to safeguard the public, reasonably demands the application of a trained legal mind. Thus, acts and services which constitute the practice of law include drafting, and preparing legal instruments and documents, such as trust documents, real estate contracts, deeds, notes, mortgages, and releases, drafting, preparing, and causing a will to be executed, preparing, or advising in the preparation of, income tax papers and returns, and preparing and prosecuting patent applications.

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Drafting Contracts is a textbook designed to teach students how to draft business contracts. It is intended for use in an upper-level drafting course, for which it would be the required text. In addition, many aspects of the textbook can be integrated into other courses—for example, a first-year contracts course, a mergers and acquisitions course, or a transactional clinic. In these courses, the book could be either a required main text, a supplemental text, or a recommended text. A lay person’s preparation of a corporate charter, bylaws, and related documents, which are important contractual documents and legal instruments, also constitutes unauthorized practice of law.

On the other hand, the drafting or preparation of simple, elementary, legal papers or documents may not constitute the practice of law. For example, the completion of a legal form which has been prepared by an attorney, where all that is done is filling in the blanks with missing information, does not constitute the practice of law. Moreover, a person ordinarily may draw a legal instrument to which he or she is a party without being engaged in the unauthorized practice of law.

China Purchase and Sale Agreements Drafting

Purchase and Sale Agreements legally transfer the ownership of a business or some of its assets to a new owner. A Purchase and Sale Agreement is one in which a seller agrees to sell assets or a business, including all of the assets owned by the business, to the purchaser. These agreements are often used for high-value sales such as real estate, equipment and machinery, multiple sales that will occur over a certain period of time, or sales that will occur sometime in the future.

Apart from the main details of the sale price and date, a Purchase and Sale Agreement can provide many relevant details of the exchange. A common limitation included in such agreements is a limitation on what types of damages a party can expect. The parties may specify that they are entitled to “specific performance” in the event of a default, meaning that if one party defaults on the terms of the agreement, such as failing to transfer the business or assets as required, the other party can ask a court to force them to transfer the business or assets. Likewise, the parties may limit the damages to the price already paid pursuant to the agreement and no more. Damages provisions can consequently guarantee a party’s expectations regarding the contract and can act to deny a non-performing party the benefit of the bargain if market conditions change after the agreement is signed.

Essentials of China buyer and sell contracts drafting

A common Purchase and Sale Contract is for the sale of a business, either through a stock sale or an asset sale. A stock or interest sale of a business involves the sale and purchase of an ownership in a specific entity, that is owned by the owners via shares or interests in the entity. A stock sale has many advantages, including tax advantages to the seller due to capital gains treatment on the profits, the buyer can more easily maintain valuable contracts such as employment contracts or leases, and there are generally fewer legal transactional costs because the assets stay with the company.

An asset sale sells each of the assets of the business individually, often including intangible assets such as goodwill and intellectual property rights. An asset sale has greater flexibility—parties can choose which assets are specifically sold in the transaction. Similarly, it can help the buyer avoid some of the disadvantageous contracts or other obligations of the seller. An asset sale often provides the buyer a better tax consequence due to the ability to depreciate the purchased assets (however some assets may be subject to a sales tax). Asset sales are sometimes governed by an Asset Sale Agreement or Asset Transfer Agreement, as opposed to a Purchase and Sale Agreement, as the sale relates only to a sale of specific assets.

A good drafter is always aware of the nexus between drafting and the business deal. Drafting Contracts emphasizes this nexus throughout, both in the material taught and in the exercises students work on.

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I am a licensed China lawyer. Most clients are foreign nationals and companies. China Lawyer Blog have associates in Beijing, Shanghai, Tianjin, Guangzhou, Suzhou, Nanjing, Qingdao, Fuzhou, Hainan, Hefei, Wuhan, Xian, Changsha, Xiamen and Hangzhou. Learn More

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China Lawyer BLog AuthorPeter Zhu, an experienced China attorney licensed to practice law for more than ten years, the author of this China Lawyer blog, welcomes any enquiry or consultation related to Chinese law.